Define Maintenance Responsibilities

A good lease agreement will spell out landlord and tenant responsibilities regarding maintenance issues in detail. Failure to adequately address these issues within the agreement can lead to erroneous assumptions as to which party is responsible for specific maintenance issues and result in landlord-tenant conflicts and/or damages to the landlord’s property due to failure of the tenant to perform certain maintenance tasks.

Without adequate definition of responsibilities, tenant failure to perform maintenance, for which the tenant can legally be made responsible and for which the landlord had assumed the tenant had been made responsible, could result in claims of non-habitability being filed against the landlord with government agencies or in court even though the tenant had accepted the responsibility. Although the landlord may prevail in defending against such claims, it can require significant time and money to deal with them.

In this article we will discuss nine of the more common maintenance issues that should be covered in the lease agreement.

Appliances

If a landlord has a choice because the state where his rental property is located has no statute against such doing so, the easiest and safest way to avoid appliance maintenance problems is to not provide any appliances, requiring the tenant to furnish his own. However, such a policy will drastically reduce the pool of potentially qualified applicants for a vacancy. A majority of tenants own no appliances and many are financially unable to purchase appliances in addition to the security deposit, first month’s rent, utility service turn-on deposit, moving costs, and various other costs of changing residence. Those applicants who do not have a problem with the cost would still prefer to rent a home that includes appliances.

Furthermore, for many rental properties, particularly those that are newer or upscale, most appliances are built-in, requiring the landlords to consider appliance maintenance issues whether they want to or not.

Unless prohibited by law, as is the case in some jurisdictions, landlords can make the tenant responsible for repair of appliances even though they belong to the landlord. However, many tenants will rebel at the idea that they will be responsible for repairing old appliances when they have no idea of the risk they would be assuming. Even when they do not object when signing the lease agreement, they will likely do so if and when an appliance needs an expensive repair. Taking the matter to court may result in the judge deciding it was an unreasonable and unfair lease clause in the first place.

The bottom line is that it is usually best for the landlord to retain responsibility for appliance maintenance except for repairs required due to damage resulting from tenant negligent or misuse actions.

Broken Windows                                                                                        

Units should have no cracked or broken window panes at the time a new tenant takes possession. The lease agreement should make the tenant responsible for replacing panes cracked or broken during occupancy. In order to avoid arguments regarding fault, the agreement should make it clear this responsibility holds no matter what the cause of damage.

Clogged Plumbing

The lease agreement and/or the move-in checklist should state that the tenant acknowledges that all toilets flush properly and all sinks, showers, and tubs drain properly at the time of moving in. Landlords sometimes make the tenant responsible for repairing running toilets and leaky faucets, but requiring or even allowing tenants to make plumbing or other repairs requiring some technical knowledge and experience can either result in failure to make needed repairs or additional cost to the landlord due to improper repairs, either of which can result in costly damages.

The lease agreement should make the tenant responsible for the items if they become clogged during the period of tenancy due to misuse, except that the landlord will be responsible for problems that occur outside the walls of the building.

Heating/Cooling Filters

In general, although rental units of all types should be equipped with new heating/cooling system filters when a new tenant moves in, tenants can usually legally be made responsible for replacing dirty filters.

However, because (1) dirty filters can result in costly equipment repairs and basic replacement filters are relatively low cost and (2) tenants cannot usually be depended upon to buy and change filters, at least until so dirty that equipment ceases operating, it is almost always best for the landlords to replace filters as part of regularly scheduled filter-change visits or better yet, the regular periodic inspections that should be provided for in the lease agreement.

Regular visits for filter changing, as is the case for more complete regular inspections, have numerous other advantages. Such visits allow the landlord to inspect the property regarding a variety of maintenance issues, including those that may not be reported by the tenant but could become costly for the landlord if not taken care of. However, having more formal periodic visits specifically for the purpose of inspection is better because the landlord will have more freedom to rigorously inspect than doing so when the supposed purpose of the visit is to only change out filters. Any interaction with the tenant, including only replacing filters, (1) allows landlords to reinforce their concern for the tenant’s comfort, safety, and security and (2) protects the landlord’s rental investment property.

Periodic inspections can also result in catching other problems which might require a warning notice, a decision to not renew a lease, or an immediate eviction. Issues sometimes uncovered during inspections include (1) undisclosed pets or particular pets prohibited by the landlord or by the insurance policy, the latter being potentially worse because it might eliminate landlord protection upon damage or injury to other tenants or to the general public, (2) poor housekeeping to the degree that it can cause damage, (3) conditions that attract insects, mice, roaches and other vermin that can become an expensive problem, (4) unusually hard use by the tenant that is causing significantly more damage than “normal wear & tear,” (5) smoking in “smoke free” units, (5) smoke and carbon monoxide detectors with dead batteries, (6) unreported maintenance problems when (a) the problems increase landlord operating expenses (e.g., running toilets, leaky faucets when water cost is paid by the landlord) or (b) the problems may become very costly if left uncorrected (e.g., leaking roofs or leaking plumbing under sinks) , (7) evidence of illegal drug use (resist the temptation to look into closets or drawers), (8) improper storage of dangerous chemicals, and (9) tenant-caused conditions that are potentially dangerous such as storing flammables near a gas appliance.

Landscaping Care

For a multi-family building, the tenants will always assume that the landlord is responsible for maintaining landscaping, including mowing the lawn. Accordingly, the lease agreement should specifically state that to be the case. If units of a multi-family building have private enclosed landscaped areas, the landlord can usually require the tenant to maintain those areas. However, it is usually to the landlord’s advantage to assume responsibility for those areas even if not required by law. The main advantage is that maintenance will be adequately performed. However, if the tenant is paying for water and//or electrical services the lease should require the tenant to not modify sprinkler timer settings.

For single-family homes, the tenant can be made responsible for any or all landscaping maintenance. However, as mentioned in the preceding it may be to the landlord’s advantage to take responsibility in order to adequately maintain lawn and planting areas. This is particularly true when it is expected that the tenant will not have the tools and equipment to accomplish the work (e.g., no equipment to mow).

Whenever the lease agreement makes the tenant responsible for adequately maintaining landscaping, the agreement should include a clause that gives the landlord the right to perform the maintenance and bill the tenant for it if the tenant fails to adequately maintain it after having been notified by the landlord of the default.

Light Bulbs

In general, although rental units of all types should be fully equipped with light bulbs at the time a new tenant moves in, the lease agreement should make the tenant responsible for replacing light bulbs during their occupancy and require that all fixtures having operating bulbs when the tenant vacates the property.

Pest Control

The landlord must usually accept responsibility for most pest control issues related to multi-family buildings. This is primarily because most pests usually migrate from one unit to another and the only effective way to control the pests or to eradicate them when they exist is to treat the entire building.

In most jurisdictions, the tenant of a single-family residence can be made responsible for needed pest control. However, this requires that the property be pest-free when the tenant moves in and that the tenant deals with pest problems that occur during his/her tenancy.

Pools & Spas

Of course, the landlord of multi-family buildings will accept responsibility for servicing and for all repairs of pools and spas. For single-family homes the tenant can be made responsible for pool and spa servicing and for repairs if the tenant is willing to accept the risk associated with repair responsibility even though he/she has no way to know the condition of the expensive-to repair/replace equipment associated with pools and spas at the time of signing the lease agreement. Furthermore, to avoid the potentially serious problems that can result from inadequate servicing of the pool or spa, it is usually best that service be provided by the landlord or by a vendor of landlord’s choice, with the rent set accordingly.

If, for some reason, providing adequate service is made the responsibility of the tenant, the lease agreement should adequately define the type of services to be performed, including perhaps even the required vendor to be used, as improper maintenance can be costly.

Smoke/CO Detectors

In general, although rental units of all types should be fully equipped with the required number of smoke detectors and carbon monoxide detectors in the required locations in accordance with all laws relevant to the location of the rental units, the lease agreement should make the tenant responsible for replacing batteries during tenancy.

However, if the landlord or his agent becomes aware of an inoperative detector when performing unrelated maintenance work or during a regular inspection, the landlord should either give written notice of the defect, reminding the tenant of his responsibilities, or remedy the problem at the landlord’s expense. I would recommend the latter, following it up with a notice that the defect has been corrected for the tenant’s protection. The cost of a replacement battery is extremely small compare to the cost of defending against a lawsuit in the event of damage, injury, or death resulting from inoperative detectors.

Maintenance Vendor Information

At the time of lease signing, lease agreement maintenance responsibilities should be discussed so that the new tenant fully understands what each party is responsible for. The new tenant should also be provided with list of phone numbers of services that they may need. This can include utility services they want to obtain (e.g., electricity, gas, water/sewer, cable TV) for moving in, emergency numbers (e.g., fire, police, ambulance/paramedic), and maintenance vendor numbers. If the landlord wishes to designate a representative with authority to deal with emergency maintenance issues when the landlord is not immediately available, the name and contact number for that representative should be provided.

Maintenance vendor numbers might include both those of approved vendors that the tenant must use for maintenance that is the tenant‘s responsibility (e.g., plumbing for clogged drains/toilets, pest control, broken windows) and those the tenant must use in an emergency for issues that are the landlord’s responsibility (e.g., heating/cooling, backed-up sewer, roof leaking, broken sprinkler line) if unable to reach the landlord or landlord’s designated representative. The lease agreement should also include the requirement of using the provided landlord-approved vendors under the two stated circumstances.

Expenditures – Part 7

In this article we explore a little further certain issues related to non-deductible expenditures, the subject introduced in Part 6 of this “Expenditures” series – that is, expenditures that must be depreciated, amortized, or added to basis rather than deducted in the year of expenditure. We’ll first briefly discuss a way of calculating depreciation that results in larger deductions in the early years of ownership. Then, we’ll take very brief looks at those expenditures that must be amortized and those that must be added to basis. Finally, we’ll briefly consider Section 179 of the IRS code, which provides a way to deduct the full cost of certain normally capitalized expenditures in the year made.

Component Depreciation

Real property, whether acquired or constructed, often consists of numerous asset types with different recovery periods.

One can usually increase the amount of depreciation in the early years of ownership by depreciating individual components of an improvement rather than the total value of the improvements which is the cost of the property less value of the land. This is often referred to as cost segregation.

Thus, property must be separated into individual components or asset groups having the same recovery periods and placed-in-service dates in order to properly compute depreciation.

When the actual cost of each individual component is available, this is a rather simple procedure. However, when only lump-sum costs are available, cost estimating techniques may be required to “segregate” or “allocate” costs to individual components of property (e.g., land, land improvements, buildings, equipment, furniture and fixtures, etc.). This type of analysis is generally called a “cost segregation study,” “cost segregation analysis,” or “cost allocation study.”

This method results in an accelerated depreciation method because it results in greater depreciation in the early years, with less in later years because many components of a building and other improvements have considerably shorter useful lives than the life allowed for the overall improvement, 27.5 years for residential property and 39 years for commercial property. The fact that useful lives for various components can be significantly less than that allowed for the entire property (e.g., 3, 5, 7 . . . . years), means significantly larger depreciation can result from cost segregation.

Although the procedure is simple in theory, utilizing it requires adequate knowledge of component costs as well as consideration of accrued depreciation if not new construction. Accordingly unless the subject property is new construction for which a breakdown of costs is available, determination of the depreciation schedule is usually best done by qualified experts so as to minimize the chance of disputes with the IRS in the event of an audit. The cost of such expertise can offset any benefit from the method, particularly for smaller properties that are not new construction.

Amortized Expenses                                                  

There are certain expenditures that cannot be deducted under IRS rules and yet can’t be depreciated because they are not property. Such expenditures can, however, be amortized. For real estate investment, the most common amortized items are related to loans. Certain items paid to obtain a mortgage on a rental property cannot be deducted in the year paid and must be amortized. Costs that must be amortized include:

• Mortgage broker commissions or other professional services related to financing,
• Abstract or title insurance fees related to financing rather than purchase, and
• Financing-related recording fees.

The Internal Revenue Code defines the period over which amortization must done.

Costs Added to Basis

There are other expenditures that cannot be deducted, depreciated, or amortized. These costs must be added to basis. Closing costs incurred when buying a rental property include a number of such items. The only deductible closing costs are those for interest, and deductible real estate taxes. Other settlement fees and closing costs for buying the property become additions to your basis in the property. These basis adjustments include:

• Abstract or title insurance fees related to purchase      rather than financing,
• Charges for installing utility services,
• Legal fees related to purchase rather than to operations,
• Purchase-related recording fees,
• Surveys,
• Transfer taxes, and
• Any amounts the seller owes that you agree to pay, such      as back taxes or interest, recording or mortgage fees, charges for      improvements or repairs, and sales commissions.

Section 179 Deduction

Section 179 of the United States Internal Revenue Code allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated. This property is generally limited to tangible, depreciable, personal property which is acquired by purchase for use in the active conduct of a trade or business.

Within the limits of IRS regulations, the costs of many items of tangible personal property that normally require depreciation can instead be wholly or partially expensed as a Section 179 deduction. The Section 179 deduction is limited by type of item and by both a fixed maximum amount and the fact that it cannot reduce net income below zero. However, the deduction not allowed for any year can be carried over to the next year.

Real property (land and land improvements) such as buildings and other permanent structures and their components are not personal property and do not qualify. Land improvements include swimming pools, paved driving and parking areas, docks, bridges, and fences. Both the ‘Tax Relief Act of 2010’ and the ‘Jobs Act of 2010’ that passed in late 2010 affected Section 179 for the 2012 tax year.

The maximum deduction a taxpayer could elect to take was $500,000 for 2010 and 2011, is $139,000 for 2012 (new and used equipment, as well as off-the-shelf software), and will be $25,000 for years beginning after 2012. The last amount will be adjusted for inflation as the rate of inflation for a given year becomes available. Buildings were not eligible for Section 179 deductions prior to the passage of the Small Business Jobs Act of 2010, whereas qualified real property may be deducted now.

Second, if a taxpayer places more than $2,000,000 worth of Section 179 property into service during a single taxable year, the Section 179 deduction is reduced, dollar for dollar, by the amount exceeding the $2,000,000 threshold. This threshold is reduced to $560,000 for years beginning in 2012, and $200,000 thereafter. The Section 179 Threshold for total of equipment and software that can be purchased has increased to $560,000 for 2012. This is the maximum amount that can be spent on equipment before the Section 179 Deduction available to your company begins to be reduced.

The new law allows 50% “Bonus Depreciation” on qualified assets placed in service during 2012. – can be taken on new equipment only (no used equipment, no software). Bonus Depreciation can also be taken by businesses that will have net operating losses in 2012.

To qualify for the Section 179 deduction, your property must be one of the following types of depreciable property.

1. Tangible personal property.

2. Other tangible property (except buildings and their structural components) used as:

1. An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services,
2. A research facility used in connection with any of the activities in (a) above, or
3. A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities.

3. Single purpose agricultural (livestock) or horticultural structures. See chapter 7 of IRS Publication 225 for definitions and information regarding the use requirements that apply to these structures.

4. Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum.

5. Off-the-shelf computer software.

Tangible personal property is any tangible property that is not real property. It includes the following property.

• Machinery and      equipment.
• Property      contained in or attached to a building (other than structural components),      such as refrigerators, grocery store counters, office equipment, printing      presses, testing equipment, and signs,
• Gasoline      storage tanks and pumps at retail service stations, and
• Livestock,      including horses, cattle, hogs, sheep, goats, and mink and other      furbearing animals.

The treatment of property as tangible personal property for the Section 179 deduction is not controlled by its treatment under local law. For example, property may not be tangible personal property for the deduction even if treated so under local law, and some property (such as fixtures) may be tangible personal property for the deduction even if treated as real property under local law.

Some Home-Based Business Issues

According to the U.S. Small Business Administration, more than half of America’s businesses are home-based. Most landlords are almost certainly operating as a home-based business, as relatively few landlords maintain an office in a commercial building unless they are either owners/managers of an extensive rental property portfolio or are also licensed real estate brokers that are in the business of managing real estate for others.

But setting up a home business doesn’t mean you can fail to consider all the same issues as important when setting up business at a different location. In this article we’ll briefly discuss some of those issues, specifically, zoning, licenses and permits, insurance, and taxation.

Zoning                                                                                                               

Your local planning office will be able to provide information regarding restrictions that could affect your business. Typically, businesses that do not affect anyone outside of the home will not be prohibited from a residential area.

Business Licenses

Business permits and licenses are usually – but not always – only a local issue. Most cities require a permit or license to operate any type of business within the city limits and this technically applies to home businesses. Many cities require a permit or license to operate rental properties and these licenses are usually in addition to the license required to operate a home office business. The rental property license requirement is often applied separately to each property location. That is, if the landlord owns 6 rental homes, 6 licenses will be required, whereas, only one license is usually required for a 6-unit complex on a single parcel. However, for multi-unit properties, the total fee is almost always based on the number of units.

Obtaining a license for a home office can sometimes create problems for the homeowner because of homeowner association bylaws or objections by neighbors. However, this will seldom be a concern for businesses that do not create problems for other property owners – e.g., traffic or parking issues.

Levels of government other than municipal governments may also require registration of rental properties. For example, Arizona property owners are required by Arizona State Law to register each rental property with the county assessor in the county where the property is located. Should an owner fail to register the rental property with the county assessor, the city may impose a civil penalty payable to the city in the amount of $150.00 per day for each day of violation. The city may also impose enhanced inspection and enforcement measures on the property.

Insurance

The fact that you have great homeowners (or renters) insurance and motor vehicle insurance doesn’t mean you are adequately protected related to your business operation. Those maintaining a home office and using a personal vehicle in their business should consult their insurance agents regarding the business usage.

A typical homeowners policy provides about $2,500 of coverage. That usually will cover equipment, probably provide an adequate policy limit. However, it won’t offer business liability protection or cover you for lost data or income.

Similarly, your motor vehicle insurance may not cover you when your vehicles are used in business operations. Also, the insurance of any employees who use their vehicles when working in your business may not cover either you or them when the vehicle is used while working in your business.

Home-based business owners usually have options for obtaining insurance protection for their businesses. The options are generally as follows:

Endorsement to their Homeowners policy – This is an endorsement added to a homeowners policy to increase coverage on business equipment. Some insurers also offer the option to buy a liability endorsement for protection in the event someone is injured on your property.

In-home business policy: An in-home business policy, sometimes called in-home business endorsements provides more comprehensive coverage for business equipment and liability than does an endorsement to their homeowners policy.

Business owners policy: This type of policy (usually called BOP) offers the most comprehensive coverage for small- to mid-size businesses. In addition to protecting against many of the same things that an in-home business policy does, it offers additional protections.

These policies vary significantly among insurers and details of coverage or limits may vary among states.

Detailed discussions of the above and of numerous other landlord insurance issues can be found in our Mini Training Guide titled “9 Landlord Insurance Issues.”

Taxes

Landlords must give consideration to a variety of taxation issues. As usual, for landlords there are taxation issues related to local, state, and federal levels. Included are:

• Property Tax,
• Rent Tax,
• Income Tax,
• Business Personal Property Tax, and
• Estate Tax.

In this limited space article we’ll only discuss briefly the federal income tax because it is the tax that most affects all landlords.

Most landlords know something about various aspects of income taxation: including, depreciation, 1031 exchanges, and a variety of other issues. Some of the issues affect all landlords, many affect most landlords, and all affect some landlords. Of the many income tax issues related to landlords, we’ll briefly discuss only two in this article – the home office deduction and the car expense deduction.

For landlords reporting a home office deduction, it is important to understand the position of the IRS regarding the matter, as a home office deduction is an item that often triggers inquiries from the IRS. The basic requirements for qualifying to claim expenses for business use of your home are that you must use part of your home:

(1) Exclusively and regularly as your principal place of business (as defined by the IRS),

(2) Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,

(3) In the case of a separate structure which is not attached to your home, used in connection with your trade or business, or

(4-6) Three other uses that are not usually of concern to landlords.

For detailed information regarding the home office deduction, we refer you to IRS Publication 587.

All landlords utilize one or more motor vehicles in the management and maintenance of their properties and deduct expenses of that use on their income taxes. However, probably few landlords fully comply with the IRS requirements regarding the deductibility of vehicle use and many do not even come close. This is another deduction for which landlords must understand and follow IRS rules in order to minimize risk of inquiries.

The IRS says that to take a business deduction for the use of your vehicle, you must determine whether the use was business or personal. If the answer is personal, no deduction is allowed. The IRS also requires that adequate records be kept regarding business use of personal vehicles. This means that one should maintain a contemporaneous log of business use of vehicles. This is best interpreted to mean a log that includes dates, places visited, and relevant odometer readings.

For detailed information regarding the subject of deducting transportation costs, we refer you to IRS Publication 463.

Question      

A tenant gave notice by phone on 9/25 that everything would be moved out on 9/29 and appears to have not returned to the property since at least 9/27. However, the keys and garage door opener have not been returned or left on the premises and there is some trash left on the property. Also, some of the rent was paid for the month but not all. Do I have to worry about whether I can rekey the locks and begin cleaning the unit?

Answer

The following discussion includes modified excerpts from articles I have previously written on the subject of your question.

The issue is whether or not possession has been returned to you. This in turn depends on the intent of the tenant, clauses in your lease agreement, the law of the state, and what events have occurred that might prove the tenant did not plan to return to the property.

Events that prove that the tenant intended to return possession to the landlord can include (1) termination of the lease term where the lease agreement does not provide for automatic renewal or the tenant did not meet the conditions stated in the lease agreement for staying beyond the term end, (2) and what the tenant stated when giving notice of intent to have vacated, with the latter being provable, and (3) return of the keys and other such items such as garage door openers.

Some states have statutes that specify procedures the landlord should follow when not certain that the tenant has abandoned the rental premises. This may include posting of a notice on the property for a certain period before taking possession.

Obvious trash or garbage that no one could possibly want to reclaim can certainly be disposed of without causing any problems. The landlord must be cautious regarding the disposal of tenant personal property when it is not clear that the tenant intended to abandon it.

In order to reduce the uncertainly regarding items left on the premises it is of benefit to include a lease clause stating that any items left on the premises beyond the date of termination of tenancy shall be considered abandoned and may be disposed of as the landlord sees fit without contact with the tenant. Abandoned property laws of many states might have priority over such lease clauses, but such clauses can still have value before judges. Even if that isn’t certain, the clauses will likely discourage tenants from pursuing the matter to begin with.

In most cases, a landlord can reasonably decide that the tenant intended to relinquish possession However, under certain circumstances the landlord should consider consulting with a competent attorney who is knowledgeable and experienced in the particular subjects of possession before taking possession of the rental unit.

Regarding unpaid rent and/or any damages, if not fully covered by the security deposit, you will need to serve notice on the ex-tenant regarding the amounts owed and demand payment. This demand can be included in the written accounting required for unreturned security deposit amounts by statutes of almost all states. If the ex-tenant did not provide you with a forwarding address, you should mail the accounting and demand to the address of the property, hoping that the tenant has provided the forwarding address to the post office. If no forwarding address has been provided to the post office, there are numerous ways to find the ex-tenant. The fact that a person has moved to another state does not prevent collection of a judgment as long as you can have the tenant served with a summons and complaint.

Further discussion of collecting from such ex-tenants is beyond the scope of this answer, but we provide lengthy discussions regarding the subject in our eCourse titled “Collecting Judgments” and in our Mini Training Guide titled “9 Steps to Collecting a Judgment.”